Jonathan Cot­ton ex­plores FinTech trends and up-and-comers

Bit­coin, blockchain, bank­ing. Ask any tech-in­clined fi­nan­cial brain and they’ll tell you that 2017 is the year these three B’s – as well as AI, robo ad­vice and host of other new tech­nolo­gies – col­lide. Brace your­self, says Jonathan Cot­ton, be­cause the way

Idealog - - CONTENT -

In 2017 we find our­selves in the midst of the global re-eval­u­a­tion of the pro­cesses and tech­nolo­gies that sup­port the mon­e­tary sys­tem. Univer­sally, coun­tries are look­ing se­ri­ously at what needs to be done to up­date their ser­vices and prac­tices for the mod­ern fi­nan­cial age. The driv­ers be­hind the shift? New tech (open data, IOT, AI and a host of de­cen­tral­is­ing tech­nolo­gies), con­sumer de­mand and new reg­u­la­tory en­vi­ron­ments.

The money is al­ready there. Ac­cord­ing to one sur­vey, in­vest­ment in FinTech quadru­pled in 2015 to $4.3 bil­lion in Asia-Pa­cific alone, with global in­vest­ment grow­ing by 75 per­cent to $22.3 bil­lion in the same year. The sec­tor it­self cur­rently rep­re­sents a $1 tril­lion global in­dus­try.

And there’s a world­wide rush get a piece of it. Hong Kong re­cently an­nounced ini­tia­tives to foster fi­nan­cial in­no­va­tion within its bor­ders, es­tab­lish­ing ded­i­cated FinTech reg­u­la­tory hubs, FinTech in­cu­ba­tors and pro­grammes to bol­ster its cy­ber­se­cu­rity. Sim­i­larly, the UK re­cently an­nounced its goal to be­come a “global cap­i­tal of FinTech”, as did Sin­ga­pore.

Closer to home, Aus­tralia has ini­ti­ated its own reg­u­la­tory changes to ac­com­mo­date its bur­geon­ing FinTech sec­tor, set­ting up a ‘sand­box’ sys­tem that al­lows com­pa­nies six months to test and re­fine their prod­ucts with­out hav­ing to ob­tain a fi­nan­cial ser­vices li­cence. The re­cent fed­eral bud­get saw the low­er­ing of li­cens­ing costs for FinTech par­tic­i­pants and the Aus­tralian Se­cu­ri­ties and In­vest­ment Com­mis­sion (ASIC) has launched an In­no­va­tion Hub with a par­tic­u­lar fo­cus on help­ing these star­tups nav­i­gate the coun­try’s reg­u­la­tory sys­tem.

Pay­ing up

Ki­wis have, his­tor­i­cally, been en­thu­si­as­tic early sup­port­ers of new fi­nan­cial think­ing – think New Zealand’s ground­break­ing adop­tion of EFTPOS and pre­science around the eq­uity crowd­fund­ing and P2P reg­u­la­tory land­scape (not to men­tion rich home-grown FinTech pedi­gree in the form of Xero, PushPay and PledgeMe, among many oth­ers).

Right now, how­ever, we seem to be miss­ing the op­por­tu­nity be­fore us and that early foray into EFTPOS may be in part to blame. New Zealand has one of the high­est lev­els of elec­tronic pay­ment adop­tion rates in the world. But other in­no­va­tive plat­forms have not had the op­por­tu­nity to thrive here as they have else­where. Sim­ply put, the pain point hasn't been high enough to de­mand change.

New Zealand’s tech­nol­ogy ex­port earn­ings are pre­dicted to sur­pass dairy by 2025 and FinTech has been iden­ti­fied as the fastest­grow­ing New Zealand tech­nol­ogy niche, with in­creased rev­enue of 31 per­cent year-on-year – twice the rate of the over­all tech in­dus­try. And a com­pre­hen­sive, gov­ern­ment-level strat­egy to en­able new think­ing and sup­port new FinTech so­lu­tions is the first step.

Pulling purse strings

One thing in­dus­try ex­perts agree on is that lessons can be learned from reg­u­la­tors in Eu­rope, Asia, the Mid­dle East and Aus­tralia that are al­ready tak­ing de­lib­er­ate steps to es­tab­lish them­selves as first-in-line FinTech cen­tres.

“We need to have a sin­gle-minded ap­proach across gov­ern­ment and reg­u­la­tors, ex­ist­ing fi­nan­cial ser­vices cor­po­rates and star­tups to fully re­alise the op­por­tu­nity,” says David Boyes, the chief tech­nol­ogy trans­for­ma­tion of­fi­cer at Ki­wibank. “Es­to­nia, Is­rael and Fin­land are ex­am­ples of smaller coun­tries that have al­ready be­come global lead­ers through this ap­proach.”

Boyes says New Zealand’s op­por­tu­nity lies in bring­ing both FinTech tal­ent and in­vest­ment dol­lars here, some­thing only pos­si­ble with a co­or­di­nated ef­fort across gov­ern­ment and in­dus­try.

“Gov­ern­ment needs to pro­tect New Zealand cit­i­zens and our econ­omy, but also en­able a strong mar­ket­place to de­velop quickly.”

In­no­va­tors need clear frame­works to work within for a mar­ket to de­velop, says Boyes, to know what they can and can’t do and to be sup­ported within the reg­u­la­tory en­vi­ron­ment.

“It needs to be as black and white as pos­si­ble,” he says. “And the at­ti­tude needs to be about reg­u­lat­ing to en­able in­no­va­tion. It’s a tough bal­anc­ing act but those coun­tries that are em­brac­ing that chal­lenge are win­ning. So the op­por­tu­nity is now to cre­ate a busi­ness and reg­u­la­tory en­vi­ron­ment to dra­mat­i­cally fast-track New Zealand FinTech.”

The ma­jor chal­lenge fac­ing New Zealand is one of pol­icy.

“The key is­sue New Zealand faces is the ap­par­ent ab­sence of a true strate­gic ap­proach to FinTech and the fi­nan­cial ser­vices sec­tor at gov­ern­ment level,” says fi­nan­cial ser­vices ex­pert Si­mon Papa. “It’s about a lot more than chang­ing leg­is­la­tion.”

That dis­rup­tion will in­clude pay­ments re­ced­ing into the back­ground as the ma­jor­ity of trans­ac­tions move to ma­chine-to-ma­chine; wal­lets be­com­ing the new mi­cro-ser­vice; to­kens re­plac­ing tra­di­tional iden­tity ser­vices and new com­pa­nies weav­ing fi­nan­cial man­age­ment and wealth into prod­uct and ser­vice cus­tomer ex­pe­ri­ences across mul­ti­ple in­dus­tries. David Boyes

Fol­low the money

Many be­lieve reg­u­la­tion is un­able to keep up with tech­nol­ogy and, even if it could, leg­is­la­tors rarely have the power to solve is­sues in their en­tirety. So how are New Zealand’s fi­nan­cial prime movers and spenders, the banks, pre­par­ing for a fu­ture where thou­sands of star­tups are nip­ping at the heels of the big, well-es­tab­lished be­he­moths.

By all ac­counts, with a mix of wari­ness and ex­cite­ment. While it's true that New Zealand’s es­tab­lished banks are en­cum­bered by their em­bed­ded in­fra­struc­ture – legacy sys­tems that have some­times been in place for decades – these for­merly static in­sti­tu­tions are in fact re­act­ing with sur­pris­ing agility.

Take New Zealand’s mo­bile/in­ter­net bank­ing cul­ture, which is light years ahead of other pro­gres­sive coun­tries such as the Nether­lands. So while it’s easy to fo­cus on the po­ten­tial de­struc­tion of in­dus­tries that dis­rup­tion brings, in this case, the banks have shown that they’re will­ing to em­brace new tech­nol­ogy when it's ex­pe­di­ent and help bring New Zealand into the new FinTech fold.

Com­pound in­ter­est

Last year Ki­wibank, Cal­laghan In­no­va­tion and Cre­ative HQ launched the Ki­wibank FinTech Ac­cel­er­a­tor, a Welling­ton-based ini­tia­tive de­signed to fast-track the growth of promis­ing Kiwi FinTech star­tups (see pro­files page 42)

The ac­cel­er­a­tor has now taken seven dig­i­tal star­tups through an in­ten­sive 14-week pro­gramme, pro­vid­ing men­tor­ing, busi­ness ed­u­ca­tion and sup­port to help them suc­cess­fully prove, build and take their ideas to mar­ket. Sev­eral of the star­tups have now launched and are plan­ning their over­seas ex­pan­sion.

The project rep­re­sents a ma­tur­ing of the con­ver­sa­tion and a new fo­cus on col­lab­o­ra­tion, says Boyes.

“The fu­ture is about banks part­ner­ing with, ac­quir­ing and even­tu­ally be­com­ing FinTech,” he says. “The fu­ture is highly in­no­va­tive and cus­tomer-cen­tric busi­nesses us­ing tech­nol­ogy to rein­vent bank­ing. Those [banks] that don’t will end up be­com­ing util­ity providers or worse.”

En­trepreneurs have also be­come aware of the power that col­lab­o­ra­tion with es­tab­lished play­ers can of­fer, he says.

“In the last few years there has been a re­al­i­sa­tion in FinTech that part­ner­ship with in­cum­bents can give faster ac­cess to large cus­tomer pools and in­cum­bents are see­ing the ad­van­tages of part­ner­ing with fast-mov­ing in­no­va­tors.”

The Blockchain gang

All things con­sid­ered, the im­me­di­ate fu­ture of the fi­nan­cial main­stream looks as if it be­longs to dis­trib­uted ledger tech­nol­ogy and its most well known vari­a­tion, blockchain.

Ac­cord­ing to re­search by UK bank San­tander, blockchain tech­nol­ogy has the po­ten­tial to re­duce bank costs at­trib­ut­able to cross-bor­der pay­ments, se­cu­ri­ties trad­ing and reg­u­la­tory com­pli­ance by be­tween $15-20 bil­lion per year by 2022. FinTechs that are fo­cused on blockchain so­lu­tions are at­tract­ing high lev­els of in­vest­ment, and legacy play­ers are al­ready ex­per­i­ment­ing with the tech­nol­ogy that looks set to rev­o­lu­tionise bank­ing, fi­nance and com­merce across the board.

So what is it, how does it work and what is its po­ten­tial?

Blockchain is a de­cen­tral­ized dig­i­tal ledger in which trans­ac­tions are recorded pub­licly and can­not be al­tered retroac­tively. Put another way, a blockchain is a list of records man­aged by a peerto-peer net­work, and is a way of fa­cil­i­tat­ing se­cure on­line trans­ac­tions with­out hav­ing to trust that trans­ac­tion to a sin­gle cen­tralised party.

“Blockchain can rad­i­cally re­duce fi­nan­cial costs in all sorts of ways,” says Mandy Simp­son, CEO at cy­ber se­cu­rity con­sul­tancy, Cy­ber Toa. “Take trans­fer­ring money be­tween coun­tries, for ex­am­ple, a process where costs are very high. If you do that via Western Union it's go­ing to cost you a small for­tune – seven, eight, nine per­cent of that to send. For mi­grants who might be send­ing just a few hun­dred dol­lars or less back to their fam­ily, that’s un­ac­cept­able.”

But the po­ten­tial of blockchain tech­nol­ogy is far more ex­ten­sive than that.

“If you want to prove that you knew some­thing at a cer­tain time, you could do that with blockchain,” says Simp­son. “It can be used to track a prod­uct through its life­cy­cle – food from farm to plate stamped with in­for­ma­tion about where it's been and how it’s been pro­cessed. It can be used for dig­i­tal rights man­age­ment for artists want­ing to man­age their own mu­sic. It can be used to track di­a­monds in a way that may even­tu­ally drive blood di­a­monds out of the in­dus­try. It’s very ex­cit­ing.”

And be­cause blockchain has the po­ten­tial to change ev­ery­thing, this is why the banks are pay­ing so much at­ten­tion to it.

“What this tech­nol­ogy solves is what I like to call ‘dig­i­tal scarcity',” says Stephen Ma­caskill, pres­i­dent of Blockchain As­so­ci­a­tion of New Zealand. “When you can copy some­thing into in­fin­ity then it has no eco­nomic value,” he says. “But if you're able to cre­ate scarcity, then you're able to give that unit a value. So we can now have dig­i­tal units that rep­re­sent things of value. That's some­thing that cryp­tog­ra­phers have been try­ing to solve for the last 40 years.”

But that's the just the first step, he says, be­cause this dig­i­tal to­ken can rep­re­sent more than just money.

“It can rep­re­sent data, it can rep­re­sent things like iden­tity, a so­cial me­dia pro­file, a stock or a bond or a share in a com­pany, a hous­ing ti­tle or a car ti­tle, or even some­thing like a vote. And be­cause it's an open ledger that any­one can see

and au­dit, that has a lot of po­ten­tial.”

Al­though ini­tially wary, the in­ter­na­tional bank­ing com­mu­nity has started to soften its at­ti­tude to­wards blockchain, ap­pre­ci­at­ing the ef­fi­cien­cies to be gained and the op­por­tu­nity for im­prove­ments to the bot­tom line. In­ter­na­tion­ally there are bank-driven pi­lot tests un­der­way and en­tire re­search teams de­voted ex­clu­sively to de­vel­op­ing blockchain so­lu­tions. Fu­tures mar­ket FinTech rep­re­sents a US$1 tril­lion mar­ket­place op­por­tu­nity and there’s rea­son to be­lieve that a wholly new fi­nan­cial ser­vices plat­form model will emerge.

“In the short term some play­ers will be re­duced to be­com­ing util­ity providers,” Boyes pre­dicts, “pro­vid­ing fi­nan­cial cap­i­tal, risk cover and data to those com­pa­nies that main­tain cus­tomer rel­e­vance by rein­vent­ing fi­nan­cial ser­vices us­ing dig­i­tal, data and cus­tomer­centric ex­pe­ri­ences.”

And, ul­ti­mately, he says de­cen­tralised tech­nolo­gies will un­leash a wave of op­por­tu­nity for those that can adapt.

“That dis­rup­tion will in­clude pay­ments re­ced­ing into the back­ground as the ma­jor­ity of trans­ac­tions move to ma­chine-to-ma­chine; wal­lets be­com­ing the new mi­cro-ser­vice; to­kens re­plac­ing tra­di­tional iden­tity ser­vices and new com­pa­nies weav­ing fi­nan­cial man­age­ment and wealth into prod­uct and ser­vice cus­tomer ex­pe­ri­ences across mul­ti­ple in­dus­tries.”

One thing that seems cer­tain right now is that dig­i­tal cur­rency – in what­ever form it takes – is

The key is­sue New Zealand faces i s the ap­par­ent ab­sence of a true strate­gic ap­proach to FinTech and the fi­nan­cial ser­vices sec­tor at gov­ern­ment l evel. It’s about a l ot more than chang­ing l eg­is­la­tion. Si­mon Papa

com­ing and that makes ev­ery­thing else un­cer­tain.

“It's im­pos­si­ble to know ex­actly how this will play out, but dig­i­tal cur­rency will be­come more pop­u­lar,” says Simp­son. “Not just the Bit­coin va­ri­ety, but dig­i­tally is­sued New Zealand dol­lars and dig­i­tally is­sued cur­ren­cies across the world. China has al­ready said that they in­tend to is­sue a dig­i­tal cur­rency of their own and you can ex­pect other ma­jor re­serve banks to be com­mit­ting to this too.”

Ma­caskill points to the rise of a new cap­i­tal mar­kets econ­omy based on dig­i­tal cur­ren­cies.

“Right now there are 800 or more dig­i­tal as­sets and cryp­tocur­ren­cies on var­i­ous blockchains around the world and peo­ple are us­ing them to raise fund­ing through ini­tial coin of­fer­ings. The in­ter­est­ing thing is that these coins are truly in­clu­sive. Any­one with a smart­phone can buy a bil­lionth of a penny of a share off one of these new age busi­ness mod­els.”

It’s that demo­cratic spirit that makes the new tech­nol­ogy so pow­er­ful says Ma­caskill.

“There are three bil­lion peo­ple in the world who are un­banked and have eas­ier ac­cess to cell­phones than they do to tra­di­tional bank ac­counts. Those peo­ple can in­vest in these new projects.”

“This new global reg­istry now has some­thing like US$60 bil­lion of mar­ket value and it trades 24/7. It crosses bor­ders. It doesn’t stop for na­tional hol­i­days. It doesn't stop for dis­as­ters.”

“I don't know specif­i­cally how that's go­ing to af­fect our tra­di­tional cap­i­tal mar­kets but there's a clear path to­wards dis­rup­tion there.”

“The only thing cer­tain is that it poses quite a chal­lenge to the sta­tus quo.” Or, depend­ing on your view, a mas­sive op­por­tu­nity.

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